No Compete for Continued Employment? Supreme Court May Decide Enforceability

April 17, 2014 – The Wisconsin Supreme Court may decide whether an at-will employee who signed a no-compete agreement in order to keep his job is bound to it.

The Wisconsin Court of Appeals has issued a certification in Runzheimer International Ltd. v. Friedlen, 2013AP1392 (April 15, 2014), which asks the supreme court to decide whether David Friedlen’s employer gave adequate consideration for the no-compete.

Friedlen had been working at Runzheimer International as an at-will employee for almost 20 years. But in 2009, the company asked him to sign a no-compete. Normally, such no competes are only signed when an employee begins a new job.

It said Friedlen, upon resignation or termination, could not provide “restricted” services to competing firms within a geographic area for a period of time.

However, the agreement was a condition of Friedlen’s continued employment. He would continue to be an at-will employee, subject to termination at any time without cause. In addition, Friedlen received no additional compensation for signing the agreement.

In deposition, Friedlen said he felt forced to sign it or risk losing his job right then. Two years after he signed the no compete, Runzheimer terminated his employment. Shortly after, Friedlen began working for a competitor, and Runzheimer filed suit to stop him.

Friedlen countered that the restrictive covenant he signed lacked sufficient consideration and could not be enforced. A circuit court agreed.

On appeal, Runzheimer argues that continued at-will employment is sufficient consideration to support a restrictive covenant. It says Wisconsin courts have never decided the issue as it concerns an agreement signed by an existing employee.

As the certification notes, Runzheimer is arguing for a rule employed by other jurisdictions, which say continued at-will employment is sufficient consideration for a no compete agreement, but only if the court determines the agreement is reasonable.

For example, in Illinois, continued at-will employment can constitute sufficient consideration for a restrictive covenant, but the employee must remain employed for a ‘substantial period,’” the appeals court explained in the certification.

The appeals court said that in general, Wisconsin courts do not review the “adequacy of consideration,” only its existence, so this would be an exception case.

Runzheimer argues that if an exception is not adopted, employers could just fire existing employees and rehire them the next day, with a no compete agreement as a condition.

Friedlen argues that existing Wisconsin case law requires an employer to give additional consideration for no competes against existing employees. He notes that other jurisdictions also follow this rule, including Minnesota.

“Our review of the relevant authority leads us to conclude that both parties are partially right,” the appeals court explained. “Thus, it appears that while there is some guidance available, the law in Wisconsin regarding this issue is unclear.”

The appeals court is asking the supreme court to decide, noting the issue is “undoubtedly likely to recur” and requires “careful consideration of public policy.”